New Theories, M&A Activities, Currencies

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New theories emerge as the markets heads higher. Does M&A activities signal something? Will currencies play the spoilsport for this rally in medium to longer term?

Does M&A (mergers and acquisitions) activities signal anything?

Will currencies play the spoilsport for this equities rally?

A weaker Indian Rupee going forward…

The peculiar Chinese scenario…Wait and Watch

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New Theories, M&A Activities, Currencies

  1. 1. 1 New Theories leading markets higher; M&A activities signal, Will currencies play the spoilsport New theories emerge as the markets heads higher. Does M&A activities signal something? Will currencies play the spoilsport for this rally in medium to longer term? Where is the actual news flow, on which global financial markets (including our markets) react, and react on a daily basis? It actually flows from the United States. And I continue with my view that Indian markets on the back of no or/and lack of news flow, will continue to react to global news flow. Markets all around the globe just wants to head higher but WHY? Every-time some amount of pessimism starts occurring; some new theory starts emerging, which takes the market higher than the previous high. This time around these theories apart from what we keeps on hearing i.e., housing recovery, consumer spending, Stabilization in Banking sector as a whole, credit flowing again, continuing low interest rates, liquidity, money on the sidelines, hedge fund money coming back to the market etc., are IPO filing, M&A deals (US$ 60 Billion of deals announced in last 5 weeks in United States) etc. Does M&A (mergers and acquisitions) activities signal anything? During the period Jan-Sep, in 2007, 2008, 2009 the total deals value (M&A) have amounted to US$ 1.28 Trillion, 833 Billion and 492 Billion respectively (source: Thomas Reuters). I believe yes, because when a corporation starts looking for utilizing shareholders money to expand its footprint either by acquiring a competitor or in order to increase the product portfolio or services, they first look at their businesses, and access their outlook for the next 12- 29th September, 2009 24 months at-least, before actually deciding on their course of action with respect to M&A. The management/CEOs then try and access the risk involved in acquiring the company, and its outlook after the deal is done. And until and unless, they would not find things to be rosy enough going forward (in the longer term), I doubt in this environment, when there is more of shareholders activism and more scrutiny on any deal which happens, they are going to go ahead with the deal. And the stock prices of either company instantly provide a feedback on the quality of the merger or the acquisition. And fortunately, most of the company which has Vinit Tulsyan http://vinittulsyan.wordpress.com
  2. 2. 2 New Theories leading markets higher; M&A activities signal, Will currencies play the spoilsport announced a merger or an acquisition, their stock prices in few days since announcement has only gone up. So the management decision to get involve in M&A activities and the stock price reaction in next couple of days of announcements provide a signal, which clearly states what the management and the investors are thinking about the prospect the deal going forward. And going by the activities taking place in M&A markets, this leads to a signal that going forward (in 2-3 years), the economic scenario should be significantly better than what it is today. The optimism has such a superior edge over pessimism that US equity markets are having the best quarter since 1998 i.e. best quarter in over a decade. And I believe this optimism will further drive this M&A deal activities going forward in the rest of 2009 and in 2010; also helping in stabilization of banking sector in some way (as revenue from this avenue starts picking up). US markets have rallied (all three major indices) anywhere in between 55-60% since the march lows (specifically since 9th March 2009), and I wrote an article on 10th March 2009 titled “OPTIMISM PLAY: BULLS ARE BACK ATLEAST FOR NOW WITH MARKETS TRYTING TO FIND A BOTTOM ON THE BACK OF HOPE”, and when things have kind of turned corners, I again now believe that Bulls will try to find a higher high on the back of more stronger economic recovery but will the currencies play a spoilsport. In this article I try and find an answer to this peculiar question… Will currencies play the spoilsport for this equities rally? I actually expect the dollar to be lower for now, but will start stabilizing once FED reverses its policy on Interest rates or on quantitative easing. At the same time I strongly believe, US will have to support the dollar in order to attract debt investors, and when that happens, in my 29th September, 2009 view there is going to be a trade-off between equities, dollar, and interest rates. Money flowing into dollar would simply mean, lower allocation for equities, interest rates moving northwards, and in-turn treasury securities will start looking as a safe haven investment once again; ultimately leading to a more inflationary environment (about which most of the experts on US economy feel that Inflation will start kicking in starting next year). Vinit Tulsyan http://vinittulsyan.wordpress.com
  3. 3. 3 New Theories leading markets higher; M&A activities signal, Will currencies play the spoilsport A weaker Indian Rupee going forward… A stronger dollar would mean a weaker Indian Rupee, and I am of view that going forward Indian Currency will be in a tight range with a negative bias. This does not necessarily mean that money (especially developed world) will start moving out of Indian equities market because of rising dollar and a more lucrative risk-return proposition with respect to US treasuries, but I definitely feel that the quantum of money supply to Indian equities will slow down. I also believe that the money supply through either ways would only pick up when we have our GDP numbers coming out and those are at-least at satisfactorily level, if not better. The peculiar Chinese scenario…Wait and Watch In China Money supply is going to the roof in order to stimulate the economy and the best solution to actually balance this is to have a strong YUAN, and if it does not happen, I believe that as the expectation which market participants worldwide have built in that China is going to lead this world in coming out of the this economic turmoil, than that point in time, the larger belief would be that China would be the country, which will lead the world in the inflationary environment. A stronger YUAN would mean, more dollars in exchange of lesser YUAN; subsequently meaning a lower value for Chinese Forex reserves (majority of which is in US Dollar). Well, there is a set-off here, and which is that when US Fed/Treasury starts reversing its policy on interest rates or/and quantitative easing, US Dollar will have a support, and which in- turn could provide a set-off for Chinese investments in US Dollar. There is a caveat as well, a stronger YUAN will start hurting competitiveness in Chinese exports, which has been contributed as the biggest reason for the turmoil in Chinese economy and result being the biggest stimulus package by Chinese authorities to help increase internal consumption and make their economy less dependent on exports; so even I do not know, how Chinese 29th September, 2009 authorities are going to handle this scenario. The Summary Now the bears are trying to find new arguments as the September analogy has failed, but they still cannot envision scenario that causes significant correction and so as me. I believe markets Vinit Tulsyan http://vinittulsyan.wordpress.com
  4. 4. 4 New Theories leading markets higher; M&A activities signal, Will currencies play the spoilsport all around the globe (including Indian markets) might not sustain the kind of moves (one way move) it has seen since 9TH March 2009, but will try to find a sense from every news flow coming out of the developed world, making the markets to turn highly volatile in shorter to medium term, but with a positive bias. *** Thanking You, Warm Personal Regards, Vinit Tulsyan http://vinittulsyan.wordpress.com 29th September, 2009 Vinit Tulsyan http://vinittulsyan.wordpress.com

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